The Controversial Passage of Assembly Bill 5

By Karyn Moore
Paul, Plevin, Sullivan & Connaughton LLP

Earlier this year, Governor Newsom signed Assembly Bill 5.  This new law codifies the “ABC” test, adopted by the California Supreme Court in Dynamex Operations v. Superior Court (2018) 4 Cal. 5th 903, as a new means of determining whether a worker should be classified as an employee or an independent contractor.  The distinction between employees and independent contractors is significant, because employees are entitled to minimum wage, overtime pay, unionization, and other protections that are not afforded to independent contractors.

The Dynemex decision overruled the long standing multi-factor common law test for determining worker classification which was established by the California Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341.  The Borello test primarily focused on who exerted control over the work performed.

The new “ABC” test (so named to signify the three prongs of the test) is a significant departure from Borello and from employers’ previous understanding of which workers could be properly classified as independent contractors.  A.B. 5 begins by stating that, unless all three prongs of the ABC test are satisfied, “a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor.”  Thus, the burden of proof as to whether a worker is properly classified now falls squarely upon the employer, since workers are presumed to be employees.  To overcome this presumption, the employer must prove all of the following:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. The worker performs tasks that are outside of the usual course of the hiring entity’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.

Part B of the ABC test is likely to have the biggest impact, since it suggests a business cannot use independent contractors to do anything that the business uses employees to do, or that is otherwise central to the business.  This is the most drastic difference from the Borello test.

A.B. 5 creates several exemption categories, each reflecting specific industry issues and containing their own stringent and complex set of requirements.  Workers who meet the specific requirements of an exemption must still satisfy the Borello test in order to be classified as an independent contractor.

One exemption category covers specific occupations.  It covers physicians, veterinarians, lawyers, private investigators, accountants, and others.

Another exemption category pertains to certain contracts for “professional services.”  This includes certain contractual services related to marketing, human resources, cosmetologists, etc.  Importantly, this exemption only applies if the hiring entity demonstrates that all of the following conditions are satisfied:

  1. The individual maintains a business location, which may include the individual’s residence, that is separate from the hiring entity’s business location;
  2. If work is performed more than six months after January 1, 2020, the individual must have a business license, in addition to any required professional license or permits for the individual to practice in their profession;
  3. The individual can set or negotiate their own rates for the services performed;
  4. Outside of project completion dates and reasonable business hours, the individual has the ability to set their own hours;
  5. The individual is customarily engaged in the same type of work performed under contract with another entity or holds themselves out to other potential customers as available to perform the same type of work; and
  6. The individual customarily and regularly exercises discretion and independent judgment in the performance of the services.

Another important exemption category is for certain bona fide business-to-business contracting relationships.  Subject to certain qualifiers, if a business service provider contracts to provide services to another business (“contracting business”), an exemption will apply if the contracting business meets all of the following conditions:

  1. The business service provider is free from the control and direction of the contracting business in connection with the performance of the work both under the contract and in fact;
  2. The business service provider is providing services directly to the contracting business rather than to the contracting businesses’ customers;
  3. The contract with the business service provider is in writing;
  4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required license or registration;
  5. The business service provider maintains a business location that is separate from the business or work location of the contracting business;
  6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed;
  7. The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity;
  8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services;
  9. The business service provider provides its own tools, vehicles, and equipment;
  10. The business service provider can negotiate its own rates;
  11. Consistent with the nature of the work, the business service provider can set its own hours and location of work; and
  12. The business service provider is not performing the type of work for which a license from the Contractors State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

In conclusion, A.B. 5’s passage is controversial, with many speculating that it will effectively topple the gig economy in California.  Whatever the impact, it is clear that A.B. 5 will substantially limit the use of independent contractors in California.  Assuming workers do not fall under one of the exemptions listed in A.B. 5, employers should consider whether reclassifying those workers as employees is appropriate.